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A tale of two crudes: Nigeria and Angola

Nigeria and Angola, both situated in West Africa, are the two biggest producers in the region, but the crudes from these two countries have treaded divergent paths in the past year, despite a lot of similarities.

Nigeria produces just over 2 million barrels of per day of crude oil that is largely light and sweet. This crude is largely low in sulfur and yields a generous amount of diesel, jet fuel and gasoline, which are the profit-making products for global refineries.

Angola, on the other hand, produces almost 1.7 million b/d of heavy but sweet crude oil — oil that is low in sulfur, but, when refined, yields a lot of fuel oil and residual fuels.

Angolan crude, however, has been finding it easier to attract buying interest than the light sweet and better quality Nigerian crude in the past year, which, until a few years ago, was the preferred choice for most refiners. But it is not only due to higher prices and economics that Nigerian crudes are struggling; a lot has to do with the customer base of both countries.

“Angolan crudes rely on countries that are growing at a rate of growth of 5% to 8% while [crudes out of] Nigeria rely heavily on Europe, where economies are generally on a decline,” said one oil trader I spoke to last week.

And I found this as a very simple yet effective explanation for why crudes from Angola, despite the lower quality compared to Nigeria, are selling swiftly. A fair share of Nigerian export crude cargoes every month are grappling to attract end user and refinery demand, and are instead being stored on ships and on storage terminals, idling away. The bulk of the oversupply in the Atlantic Basin crude market is comprised of Nigerian crudes. A lot of Nigerian crude is floating on the seas and in storage tanks with no home and no destination.

Little interest in Nigerian crude in Asia

Almost 65% of Angolan crude exports last year went to Asia, with 49% of that going to China, according to data published earlier this year by the US Energy Information Administration.

China is the biggest consumer of the Angolan heavy to medium sweet crude oil, while conversely not even 1% of Nigerian crude goes to China. China is the second largest consumer of crude oil, and when it does not figure at all as one of your regular buyers, you know you have a problem. And Nigerian crude is suffering because of this. China likes crude oil that is heavy and sweet, as it fits the appetite of its refineries that produce a lot of fuel oil to keep its industrial and manufacturing economy marching on.

China also has a lot of complex and sophisticated refineries that can still produce middle distillates by distilling heavy crude oils, making the refiners much better margins. So China ignores Nigerian crude for now, as their demand for light sweet crude oil is very sparse. It is high time Nigeria found a way to attract its crude oil to China.

Nigeria: The biggest casualty of rising US shale oil production

Until about seven years ago, the US, which remains the largest oil consumer in the world, used to buy more than 1 million b/d of light sweet Nigerian crude oil — almost 50% of Nigerian oil exports at the time. In 2014, only 3% of Nigerian exports went to the US, according to the same data published by the US EIA. Nigeria lost its biggest buyer, and the reason for this has been the dramatic rise in US shale oil production.

US shale oil is extremely similar in quality to light sweet Nigerian crude oil, and as more and more shale basins were discovered in its own backyard, the US did not need any more oil from Nigeria.

Last year, there were six weeks in a row starting from early July during which the US did not import a single barrel of crude oil. This was the first time that the US had not imported any Nigerian crude oil for such a length of a time, since US EIA started compiling this data almost four decades ago.

The shale revolution has had a profound impact on the makeup of the US import market, which has, by extention, greatly altered the direction of crude flows both within Europe and to Asia. And Nigeria has been the biggest casualty of this.

As the imports of light sweet crudes in the US decline substantially, its appetite for heavy crude oils have in fact observed a bit of a boost over the last few year. As a lot of US refiners are blending these heavy crudes with shale oil, demand for heavy Canadian, Venezuelan and Saudi Arabian crudes has remained robust.

Angola has another unique selling proposition, as advertisers or marketers would say. Angolan is one of the few regions in the world that produces heavy crude oil that is sweet, as in, low in sulfur. And with global environmental policy shifting towards cleaner fuels, Angolan crudes are benefiting from this.

Nigeria needs to find demand in growing economies

India is the largest buyer of Nigerian crude, which has been one of the positives for the West African country in the last few years. Indian state-owned refiners like Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation are key and consistent buyers of Nigerian crudes like Qua Iboe, Bonny Light, and Agbami.

But demand from India for Nigerian crudes is slightly on the wane as its demand for Latin American crudes is growing sharply. India is also the largest buyer of Venezuelan crudes, and with refineries getting more and more complex in the sub-continent, their demand for light sweet crudes is expected to tail off. The world’s largest refinery complex situated in Jamnagar in the western state of Gujarat in India, operated by Reliance, runs primarily on heavy crudes, dominated largely by crudes from the Middle East and Latin America.

In 2014, 45% of Nigerian crude exports went to Europe, according to the EIA data. But the issue for Nigeria is that it is so dependent on a region where crude demand is stagnant as a lot of economies are still stumbling and it needs to find demand in countries that are growing, particularly in Asia.

It also needs to be more creative in finding customers. Five years ago, no crude from the North Sea used to find its way to South Korea, but the European Union and South Korea signed a free trade agreement almost four years ago, and now Forties crude from the United Kingdom regularly flows to South Korean refineries — and sometimes even to China.

Angola also recently found a new buyer in Chile last year as both countries signed a term agreement. Angola is now the largest supplier of oil outside of South America to Chile.

Nigeria needs to be inspired by such examples, and with a new government taking over in Nigeria in just over a week, it needs to up its game if it wants its oil industry — which it depends on heavily — to prosper.